Federal contracts slump to Reagan-era pace amid cuts

U.S. DEFENSE CONTRACTORS -- including Providence-based Textron Inc. and its subsidiary Bell Helicopter -- saw the value of their government contracts fall 11 percent in the year ended Sept. 30, the largest annual decline since records began in 1984.

WASHINGTON – Government spending cuts last year contributed to the fourth straight annual decline in federal contracting, the longest stretch since Ronald Reagan was president, statistics show.

The value of contracts to companies such as Boeing Co. and Northrop Grumman Corp. fell 11 percent in the year ended Sept. 30 from the previous period. It is the biggest annual decline since records began in 1984, according to data compiled by Bloomberg Industries analyst Brian Friel.

The reductions led contractors to shed jobs and could spur another round of defense industry consolidation. Analysts tied most of the drop to across-the-board spending cuts under a process known as sequestration, including $85 billion that started March 1 for fiscal 2013. A congressional budget accord relieved the Pentagon of $22.3 billion in cuts set for this fiscal year.

“This is not a case of government functions being moved from federal employees to contractors or vice versa,” said Dan Gordon, associate dean for procurement law at George Washington University Law School in Washington and former top procurement official for President Barack Obama. “This is the government spending less.”

The value of unclassified federal prime contracts, publicly announced deals of at least $3,000, in the 12 months ended Sept. 30 fell to $456.2 billion from $512.8 billion in the previous fiscal year. The totals exclude intelligence projects or awards to subcontractors.

‘Adverse effect’

“Sharp and immediate cuts in government spending – for example, due to sequestration – have had an adverse effect on the recovery,” said Frank Benenati, a spokesman for the U.S. Office of Management and Budget. “On the other hand, in a fiscal environment where total appropriated spending is capped, saving money through more efficient contracting makes more resources available for other, higher-value government activities.”

Combined with a 5 percent decline a year earlier and smaller declines in fiscal 2010 and 2011, federal contract spending has retreated in four years in a row for the first time since Republican Reagan presided over reductions from fiscal 1986 through 1989. After stepped-up spending on the military in his first term starting in 1981, Reagan in his second focused on reducing federal deficits following enactment of his tax cuts.

Defense contracts dropped 14 percent to $314.1 billion, as the automatic cuts have trimmed defense spending about 13 percent since March. Only a small part of the decline reflected less spending after the U.S. pulled out of Iraq and began scaling back its forces in Afghanistan, analysts said.

‘Going gangbusters’

The spending cuts helped to trim aerospace industry jobs 2.1 percent to 618,200 this year from 2012, even as companies sought non-government business and foreign contracts to make up for less U.S. contracting, according to Aerospace Industries Association projections.

“The commercial side is going gangbusters but it’s not going fast enough to offset the layoffs on the defense side,” said Dan Stohr, a spokesman for the Arlington, Va.-based trade group for companies such as Lockheed Martin Corp. and Boeing. “The reduction in contracts, especially defense contracts, is what’s directly affecting our workforce.”

Job cuts

Top defense contractor Lockheed announced in November that it was cutting 4,000 jobs and closing some operations. Still, the Bethesda, Md.-based company was helped by orders for its F-35 fighter jet, the most expensive U.S. weapons system, Friel said.

A Lockheed spokesman, Gordon Johndroe, declined to comment.

No. 2 contractor Boeing, based in Chicago, saw production of its C-17 military cargo aircraft wind down.

“There’s a regular ebb and flow to government contracting that can cause what otherwise would be notable fluctuations in annual data,” said a company spokeswoman, Meghan McCormick.

Contractors face “years of increased competition as the pie shrinks,” said Rob Nichols, co-chairman of the government contracts group at law firm Covington & Burling LLP. “They’re looking to preserve as much of the pie as possible through congressional outreach, bid protests and other competitive tools.”

Total bid protests filed in the past fiscal year declined 2 percent from the previous 12 months, to 2,429 from 2,475, according to the Government Accountability Office.

In terms of larger contracts, Nichols said his firm handled 10 protests involving awards of at least $100 million, double the pace from a year earlier.

Embassy services

PAE Government Services Inc., whose parent company is owned by private equity firm Lindsay Goldberg & Co. LLC, is one of Nichols’ clients. PAE retained a $1 billion State Department contract for embassy support services over protests by DynCorp International Inc. and KBR Inc. PAE lost its challenge to the award of a $130 million Navy contract to KBR.

“You can’t just let a major part of your market portfolio go away without fighting for it,” Nichols said.

Declines in defense spending also will encourage companies to consolidate, Friel said.

That process is already underway. In December, Textron Inc., the No. 31 federal contractor, said it would buy the parent of Beechcraft Corp.; and No. 42 Engility Holdings Inc. said it would acquire Dynamics Research Corp.

“When you buy a company, you reduce your overhead costs across both companies,” Friel said. “You also buy your way into other markets.”

Election issue

The ongoing spending cuts required by sequestration could become an issue in this fall’s congressional elections, said Loren Thompson, a defense analyst with the Lexington Institute, an Arlington, Va.-based research organization.

“Voters are more responsive to spending increases than they are to arguments for fiscal discipline,” Thompson said. “Federal spending trends have becoming the single biggest drag on the economic recovery.”

Congressional Republicans have led efforts to cut federal spending as a way to reduce the budget deficit, and are pushing legislation they say will create jobs.

“The top priority of middle-class families who are struggling in this economy, and the top priority of the people’s House, is creating new jobs,” House Speaker John Boehner, an Ohio Republican, said Jan. 10.

The statistics show budget-cutting policies that could contribute to job destruction, not creation, Gordon said.

“If anything, it will act as a drag on the recovery,” Gordon said. “The problem is until now all we had were anecdotes, and this replaces anecdotes with hard facts.”

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